Tag: What Are the Risks for the Factoring Business?

In the factoring business, factoring companies advances you a portion of your invoices. You don’t have to wait 30-60 days to get your funds, and so you can use it for emergency expenditures which can help keep your business stay afloat. But for this service, the factor will charge you a certain fee, just like a bank would charge interest for a loan.

In all honesty, your factor takes some risks when they offer you the advance money. This is why it’s justified when they charge you higher fees than what banks charge for loans. It’s not only that offer a faster application and setup process. It’s also to compensate them for the risk they are taking, or for the actions they take to minimize these risks.

Here are a few of the risks of factoring companies:

The invoice may not be real. These things happen. A business may have some invoices factored and so they receive 80% of the value of the invoices in advance. But perhaps no sale was made to that company, and the invoices are fake.

It’s for that reason the factor has to take steps to verify the authenticity of the invoices. The factor may have to confirm with the customer that your business did sell the volume of goods at the price specified in the invoice. They’ll also confirm when the invoice is due.

Are your customers creditworthy? Even if the invoices are authentic, the paying habits of your customers must also be investigated. They should have a good record of paying their debts in full and on time.

When your customers have a habit of not paying in full or on time, they represent a risk not just for you but for the factors as well. The factor may charge a higher fee for advancing you the money, or they may even refuse to advance you the money altogether.

Of course, your best option here is to not offer credit to these customers in the first place. But if you do, you may have to wait when they pay in full, or if they pay at all.

Do you have very few customers? The stability of your company matters to the factor, and that means they want you to have a large customer base to rely on. If you only have one or two customers, then your company’s future is in jeopardy. Your business can fail if even a single customer goes under or if they stop doing business with you.

There are several other risks, such as your own company’s credit history. It’s for all these reasons that the factoring business charges its fees.